Ashes To Ashes

One of the great paradoxes of life is that there are some things that can only be found by not seeking them. That is true of enduring happiness and enduring love. Both are typically the by-products of something else. Could it also be true of enduring wealth?

This is the day Christians mark their foreheads with the ashes of palm fronds.

The ceremony reminds us that it is from ashes we arose and to ashes we shall return. It is designed, perhaps, to encourage a moment of reflection. You do not get something from nothing. Ashes produce ashes.

For many people, the cares of this life have become amazingly simple — getting money and spending it. Get it as quickly as possible. Spend it anyway you want.

Jim Collins wrote a book in 1994 called “Built to Last.” It told the story of how the great businesses in America were built — Disney, Boeing, Walmart and many others.

It is the story of hardwork, vision, luck, persistence …and concentrated effort over, usually, a long time. The heroes of the story were not people motivated by the desire for quick wealth. Instead, they sought to build great companies and got wealth as a by-product.

Collins also teaches a course on the subject at Stanford University. He sends his students out into the world armed not merely with the insights he has gleaned from years of study, but also with the attitudes that those insights imply. That is, his students often hope that they, too, may get a chance to build the kind of company that will last.

But recently, Collins and his students have been disappointed. One of his students reports back to academia from the real world of business, circa A.D. 2000:

“I developed our business model on the idea of creating an enduring, great company — just as you taught us to do at Stanford — and the VCs looked at me as if I were crazy. Then one of them pointed his finger at me and said: `We’re not interested in enduring, great companies. Come back with an idea that you can do quickly and that you can take public or get acquired within 12 to 18 months.'”

In short, “Built to Last” is out. Built to Flip is in.

“An intriguing idea,” says Collins. “No need to build a company, much less one with enduring value. Today, it’s enough to pull together a good story, to implement the rough draft of an idea and — presto! — instant wealth. No need to bother with the time-honored method of most self-made millionaires: to create substantial value by working diligently over an extended period. In the built- to-flip world, the notion of investing persistent effort seems, well, quaint, unnecessary — even stupid.” “The built-to-flip mind-set views entrepreneurs like Bill Hewlett and Dave Packard, co-founders of Hewlett-Packard, and Sam Walton, founder of Wal-Mart, as if they were ancient history,” Collins continues, “artifacts of a bygone era. They were well-meaning and right for their times, but today they look like total anachronisms. Imagine Hewlett and Packard sitting in their garage, sipping lattes, and saying to each other: `If we do this right, we can sell this thing off and cash out in 12 months.'” Collins traces the beginning of the new attitude to Aug. 5, 1995. That is the day that Netscape went public. Its shares doubled in 24 hours. The gold rush was on.

Soon there were hundreds, and then thousands, of new miners. EBay, E*Trade, — the names have become familiar because they’ve spent billions of the money they raised to advertise themselves. Investors lined up to buy…and sell…the shares — often coming and going within minutes. These shares were built to flip — not to own. God forbid you forgot you owned them.

By Jan. 15, 1999, the Built to Flip culture was so well- developed that when MarketWatch went public on that date the shares rose 475% — and flipped three times — all within the first day of trading.

It was easy money. Venture Capital investing had risen from $6 billion to $17 billion since the mid-`90s. And the Nasdaq speculators seemed willing to buy anything…or at least, flip anything…that came their way.

Meanwhile, an article in “Vanity Fair” chronicles some of the stories behind the Built to Flip business culture. On a single day a company called NetZero came to “be worth almost as much as United Airlines.” In its first and only year of business, it lost $15.3 million. It gives away its product — in a market that is extremely competitive. And it does not have any hope of making money in the foreseeable future. An Internet stock analyst told the “Wall Street Journal,” “[I had] never seen a worse business model in all my life.”

Nevertheless, NetZero has made a lot of people rich. And one of the money managers who put money into the project explained to “Vanity Fair’s” reporter the new formula for getting rich: “Quit your job. Hole up for a weekend writing a business plan. Forge a strategic partnership with an Intel. Raise some prominent venture capital money. Get Goldman to take you public.”

And thanks to this new model, the Forbes 400 ranking of the richest Americans is getting a lot of fresh faces. The turnover rate last year was twice that of previous years.

More than ever before the public seems willing to hand over its own money to launch these callow youths to great wealth. In the old days, a business would have to prove that it could make money before going public. Bill Gates practically had to be forced to go public. His business was such a proven success — he had no need to sell shares to the public. (Yet he had given away so many stock options — which also disguised the true profitability of the business — that he almost became public de facto.)

Now, you don’t have to wait to prove that you can make money. You go public to get the money to test it. Flip the shares as soon as possible. Flip the company. Flip yourself into something new. Flip, flip, flip…until you flop.

Most new ventures do not work. Previously, they slipped quietly back to ashes without anyone noticing. The entrepreneur lost time and money. His mother-in-law, from whom he borrowed money, was annoyed with him. Maybe a venture capital firm lost money, too. But they took a calculated gamble and could afford the loss.

But now all the risk is in the public markets — funded by people who are mortgaging their homes and holding back their tax payments. Individual investors are flipping the shares…unaware that they’ve helped create a cynical, predatory business culture. The entrepreneurs of the past have been replaced by hustlers.

Even entrepreneurs with long-term commitments and good ideas often, if not usually, fail. Home Shopping Network — the e-tailer extraordinaire of 1986 — is still in business. But investors who bought the stock after the first day of trading made no money. Boston Chicken, the hottest IPO of 1993 with a `can’t miss’ business plan, is now in Chapter 11.

Today’s hustlers may have a decent chance of getting some easy money. But they will not produce enduring wealth. Creating businesses takes hard work — and all the qualities, talents and sacrifices that Collins details in his ’94 book. Anything less than that practically guarantees failure. They’re creating businesses that are built to turn to ashes. Your ever-optimistic correspondent,

Bill Bonner

Paris, France March 8, 2000

*** The Dow plunged through the 9,862 level yesterday — completing the head-and-shoulders pattern that chartists find so illuminating.

*** And it kept right on falling…coming to rest at 9,796. Down 374 points…or 3.68%. This takes the Dow down 17% below its January high. In fact, if you computed the old, or “Classic,” Dow, such as it was on Nov. 1, 1999 — including Union Carbide, Goodyear, Chevron and Sears — it would be down to 9,140…or 22% off its peak.

*** You’d think this would get the financial media’s attention. You’d think the expression “bear market” would be on everyone’s lips. But no…the media is more interested in the fact that the Nasdaq rose briefly above 5,000 yesterday.

*** NOTHING…can stop the Nasdaq — or so the light- headed brigade seems to think. “Interest rates or worries about the economy don’t matter,” said Hugh Johnson, chief investment officer at First Albany Corp. Apparently, with a straight face.

*** The Dow’s tumble was blamed on an announcement by Proctor and Gamble that earnings would be below expectations. Investors took 31% off P&G’s market cap.

*** The other bad news yesterday was that the price of oil continues to rise. It went up $1.95 to $34 — its highest level in 10 years.

*** Bill Clinton warned OPEC nations that the high price would cause a “big drop in demand.” Maybe in the long run. But in the short run, millions of Americans are hoping to take trips in their land barges this summer. It will take a long time to retool the economy to lower oil usage.

*** “What we want,” said the president, “are stable oil prices that aren’t too high.” That is what the Democrats want…but not necessarily the Republicans. In fact, a cynic might suspect that George W. Bush — with his oil industry experience and contacts — might be in a better position to influence the price of oil. (If anyone could.) And he might prefer a higher oil price, rather than a lower one — at least until November.

*** Regardless of what Clinton wants — what he’s got are higher oil prices…and lower stock prices. The bear market in the Dow seems to be picking up speed. The loss yesterday alone was about $350 billion. And that’s net. Nasdaq bulls say the money is going from the Old Economy to the New one. But that’s not what happened yesterday. The Nasdaq fell, too. Down 57 points. The $350 billion vanished. Is this the deflation that the gold price foretells? The currency of the stock market is being knocked down. It is disappearing. You cannot even load it in a wheelbarrow.

*** Transportation stocks were hit by the higher oil prices. The index fell 112 points. Utilities were down slightly.

*** There were two times as many stocks declining as advancing and three times as many hitting new lows as new highs.

*** The S&P was down 35 points. Gold was up a little.

*** What’s the story with Proctor and Gamble anyway? The government says productivity rose 6.4% in the last quarter. Unit labor costs were said to decline 2.5%. P&G should be making more money, not less. I guess they don’t own any computers.

*** A better explanation is that the information era doesn’t lead to higher profit levels — and the figures are nonsense anyway — as I’ve explained previously.

*** But P&G is a good company. Its products are used all over the world. The company is followed by legions of analysts and owned by pension funds and other conservative investment institutions. And yet one bad earnings announcement and the stock falls almost a third. It was at 118 in January. Now the stock is at 58.

*** What will happen, one wonders, when Amazon, Priceline, .Net-this or .com-that, announce that they will have no earnings at all? I don’t know. But it is something to look forward to later this spring — along with cherry blossoms and asparagus. *** William Fleckenstein of Silicon records another low ebb in sanity: “A friend of mine who is a computer software consultant has decided not to pay his quarterly taxes to the Fed and put it in the stock market instead. He says the penalty is only 9% and he can easily earn that back in the market.”

*** “If any country could screw up something as simple as [dollarizing its economy],” writes the Oxford Club’s Steve Sjuggerud, “it’s Ecuador.” Instead of simply announcing that they are linking the sucre to the dollar, Steve points out, they decided to put their own “zany twist” on dollarization. In short, they want to shadow the dollar, rather than link to it — leaving them plenty of room in the penumbra to manipulate their currency…and thus eliminating the benefits of dollarization.

*** John Myers lives up in the north country — Calgary, Canada, to be precise. He writes that a 28-year-old from nearby Moose Jaw has made good — and thus illustrated the cosmic gap between the Old Economy and the New one. The man might have worked a “2-section” farm of 1,280 acres. He could have grown wheat every year, with no expenses, and saved every penny, for 19,000 years and still not made as much money as he made last Wednesday when his Internet ship came in. The e-shopping mall he founded is now valued by the market at about $7 billion.